What is Political Economy? – Professor Sir Donald MacKay

Earlier this year I made a presentation to the Edinburgh Breakfast Rotary Club on “The Political Economy of Home Rule.” This will provide the starting point of an economic commentary to Reform Scotland’s own blog which is born this month. Any errors of fact or opinion are my own doing but, from time to time, I will introduce commentary from colleagues and friends on more specific issues where they have a particular insight.

What is Political Economy?

When there were only the four ancient Scottish universities “Political Economy” was the title of the general honours degree in economics. This was only right and proper given that Adam Smith, born in Kirkcaldy and once the Professor of Moral Philosophy at Glasgow, was the author of “The Wealth of Nations,” the most influential text of the “Scottish Enlightenment.”

Some economists find his analysis too simple by half but the most influential of my teachers advised that “if you want to be a professional economist, never be frightened to state the obvious.” Smith lived when the British economy was being transformed by the Agricultural and Industrial Revolutions. Yet economic policy was driven by mercantilism, this being the notion that the economy should be regulated to promote the power of the state, for example through the acquisition of foreign colonies who should only trade with the mother country. This brought the British state in to direct conflict with the American colonies. The publication of The Wealth of Nations in 1776 coincided with that of the American Declaration of Independence.

Smith got a number of things wrong, most notably that labour was the only source of value, a view often described as “loading Marx’s gun for him,” but he recognised what we call today “human capital.” His observation of the emerging manufacturing and industrial enterprises in Europe (especially in Britain) identified the increasing division of labour as the major factor in enhancing productive capacity and that the extent of the division of labour would be enhanced by reducing the barriers to trade between communities and countries.

Smith was concerned that the pursuit of business interests should not result in “a conspiracy against the public,” an evident example of this being the East India Company protected by Royal Charter. Smith considered that effective competition was preferable to the exercise of monopoly power. In present terminology he believed a “small” state was preferable to a “big” state. The state did have a central role in providing services which would not be adequately provided by the market (e.g. justice, defence and public works). Yet “kings and ministers” should “look well after their own expence (sic), and they may safely trust private people with theirs.”

The wealth of a nation is also strongly influenced by its natural and acquired advantages. As Smith put it, “Whether the advantages….be natural or acquired ….As long as one country has these advantages, and the other wants them, it will always be more advantageous for the latter, rather to buy of the former than to make.” Any economic historian will recognise this in the subsequent development of the theory of comparative advantage.

Smith travelled widely in Europe (as a tutor to a scion of Buccleuch family), read deeply and observed, at first hand, the supply side changes transforming the British economy and society. Smith would have approved of the old saw that those who cannot remember the past are condemned to repeat it. Not for him Hegel’s dictum, “What experience teaches us is that people and governments have ever learnt anything from history, or acted on principles derived from it.”

And here’s the rub. The constitutional crisis we are in, and it is a crisis, shows little sign of a sensible solution. There is a marked refusal to learn from our own history. As Voltaire put it, “History never repeats itself. Man always does.” And that is what we appear to be doing again. So in my next economics blog I will review what we might learn from the experience of the Irish home rule movement.

Professor Sir Donald MacKay is a pastChairman of Scottish Enterprise and was an economic adviser to the Secretary of State for Scotland for over 25 years. He is a member of Reform Scotland’s Advisory Board.

Reform Scotland

Reform Scotland is a think tank which aims to inform and influence policy debate through robust research, the publication of reports and briefings and by arranging lectures and seminars. It is a charity, independent of any political party, and is funded by donations from individuals, charitable trusts and corporate organisations.